Another financial problem

June 9, 2008

Recently I was listening to podcast in which someone posed the following question: What can central bankers learn from academic economists and vice-versa. To which the answer was a surprising “Not much”! Apparently, the reason for this is that the best central bankers are the best academics. Now this was burped out as if it was a good thing, but I couldn’t disagree more. This is probably the reason we are currently living in high financial turbulence and probably heading for a 30s style recession: too much cross pollination between the practical world and the academic world. This kind over-pollination is never a good thing. Look at the example of the hedge fund set up in 1994 by  Myron Scholes and Robert Merton, joint winners of the 1997 Nobel prize in economics. It had the best of all possible credentials but it went bust in 1998. Theory and practive rarely marry that well and economics as discipline suffers seriously from this.

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Zopa

April 2, 2007

Zopa is one of the best ideas going around the web today. It enables you to bypass the bank both as a borrower and as a lender. If you need cheap money, Zopa is a fantastic option, since you can get much better rates than the ones you get from the bank. If you have some spare cash you can lend it at Zopa and make money at a better interest than normal current bank accounts seem to offer.

I think Zopa is even better for those that want to consolidate debts, particularly those that run debts on expensive credit cards.

Now if you are a lender you may ask; what if the people I lend the money don’t pay? Well, Zopa does two things to cover this risk. First, if persona A borrows £1000 from Zopa, you personally only lend them £10 with 99 other people lending £10. This spreads the risk, so if person A doesn’t pay you only lose £10 rather than £1000. Second, they do credit score checking like a normal bank and spread their borrowers across different markets. Some are more risky than others and you as a lender can always choose.

I have been using it since May 2006 and I think it is great.